Performance Auto Company operates a new car division (that sells high performance sports cars) and a performance parts division (that sells performance-improvement parts for family cars). Some division financial measures for 2017 are as follows:E (Click the icon to view the data.)Read the requirements.Data tablerounded to one decimal place in the format X.X%.)RequirementsNew CarPerformance1. Calculate return on investment (ROI) for each division using operating incomeas a measure of income and total assets as a measure of investment.DivisionParts Division2. Calculate residual income (RI) for each division using operating income as aTotal assets2$35,000,000 $32,312,500measure of income and total assets minus current liabilities as a measure ofinvestment.Current liabilities2$6,500,000 $৪,000,0003. William Abraham, the New Car Division manager, argues that the performanceparts division has "loaded up on a lot of short-term debt" to boost its RI.Operating income$42,450,000 $2,585,000Calculate an alternative RI for each division that is not sensitive to the amountRequired rate of return9%9%of short-terdebt taken on byperformance partsision. Comment on theresult.4. Performance Auto Company, whose tax rate is 35%, has two sources of funds:long-term debt with a market value of $20,000,000 at an interest rate of 10%,and equity capital with a market value of $12,000,000 and a cost of equity of16%. Applying the same weighted-average cost of capital (WACC) to eachPrintDonedivision, calculate EVA for each division.5. Use your preceding calculations to comment on the relative performance ofeach division.

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esidual income (RI) for each division using opera income and total assets minus current liabilities aham, the New Car Division manager, argues th on has "loaded up on a lot of short-term debt" to n alternative RI for each division that is not sensi m debt taken on by the performance parts divisic

esidual income (RI) for each division using opera income and total assets minus current liabilities aham, the New Car Division manager, argues th on has "loaded up on a lot of short-term debt" to n alternative RI for each division that is not sensi m debt taken on by the performance parts divisic

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter9: Responsibility Accounting And Decentralization

Section: Chapter Questions

Problem 5PA: Financial information for BDS Enterprises for the year-ended December 31, 20xx, was gathered from an...

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Financial information for BDS Enterprises for the year-ended December 31, 20xx, was gathered from an accounting intern, who has asked for your guidance on how to prepare an income statement format that will be distributed to management. Subtotals and totals are included in the information, but you will need to calculate the values. A. In the correct format, prepare the income statement using the following information: B. Calculate the profit margin, return on investment, and residual income. Assume an investment base of $100,000 and 6% cost of capital. C. Prepare a short response to accompany the income statement that explains why uncontrollable costs are included in the income statement.
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